AICPA Accounting Guide on Revenue Recognition Update

Subsequent to the issuance of FASB Accounting Standard Update (ASU) 2014-09, “Revenue from Contracts with Customers (Topic 606),” the AICPA formed 16 industry task forces to help develop an accounting guide on revenue recognition. The health care industry task force identified 11 implementation issues. Of these implementation issues, the task force has finalized two issues that are significant to hospitals and other health care entities:

Issue 1 – Self-Pay Patients

This implementation issue analyzes the application of step 1 (determining if there is a contract) and step 3 (determine the transaction price) for health care services provided to self-pay patients, including uninsured patient balances and self-pay patient balances arising from copayments and deductibles. It discusses evaluating whether a contract exists and what (including consideration of implicit price concessions) the transaction price is to arrangements for health care services provided to self-pay patients and balances arising from co-payments and deductibles. While the provision of Topic 606 will impact all revenues or potential revenues of a health care entity, including those from third-party payors, this issue was specifically directed to self-pay patients due to the complexities involved in determining the ultimate expected collectability of services, if any.

Under step 1, a health care entity should determine whether it has a written, oral or other contract with a patient/customer. Evidence of a written contract may be obtained through forms such as a signed patient responsibility form. An oral or implied contract may exist if procedures were scheduled in advance. Other services, such as those with unresponsive patients admitted through the emergency room are more difficult to determine; the health care entity should perform an analysis of the specific facts and circumstances to assess enforceability, including customary business practices.

Under step 3, a health care entity is required to determine the transaction price, which includes determining whether a patient is committed to performing his or her obligation (i.e., pay for services) or determining if it is probable that it will collect the consideration to which it is entitled. This becomes more difficult when the party responsible for payment has not yet been determined, such as a pending Medicaid account. In this situation, or for uninsured patients (which may ultimately have insurance, be true self-pay or qualify for charity care), a health care entity may determine that evidence is not available to support the ability to collect consideration and revenue would not be recorded initially. Alternatively, if a health care entity has historical information on similar patients (i.e., pending Medicaid), estimates may be made regarding the potential outcome (i.e., qualify for Medicaid, qualify for charity care, or become uninsured self-pay) and consideration would be allocated based on this history. In either situation, as additional evidence is available, revenue would be adjusted accordingly (i.e., pending Medicaid qualifying for Medicaid or uninsured qualifying for charity care).

Another important consideration for a health care entity is whether self-pay balances include implicit price concessions. In determining whether a health care entity has provided an implicit price concession to a patient with a self-pay balance, a health care entity needs to determine whether “the customer has a valid expectation arising from an entity’s customary business practices, published policies, or specific statements that the entity will accept an amount of consideration that is less than the price stated in the contract. That is, it is expected that the entity will offer a price concession,” or “facts and circumstances indicate that the entity’s intention, when entering into the contract with the customer, is to offer a price concession to the customer,” as noted in FASB Topic 606. An implicit price concession does not have to be specifically communicated or offered to the patient by the entity and may exist even if the entity will continue to attempt to collect the full amount of billed charges. Implicit price concessions are often present when a health care entity’s customary business practice is to not perform a credit assessment prior to providing services, or the health care entity continues to provide services to a patient even when historical experiences indicates that it is not probable that the entity will collect substantially all of the billed amount.

A contract with an implicit price concession is considered to have variable consideration. Accordingly, expectations of eventual collection should be “at a level at which it is probable that the cumulative amount of revenue recognized would not result in a significant revenue reversal.” To assist in determining this amount, the implementation guidance provides multiple factors to consider:

Consideration from patients is susceptible to factors outside the entity’s influence

Ultimately, the AICPA health care industry task force determined that self-pay revenue should be recorded at the net expected collection balance, rather than at gross internal charges and net by an expected provision for bad debts. Accordingly, changes in estimated ultimate collection of self-pay balances should be adjusted through revenue, rather than as bad debts. If there are significant differences in estimates, a health care entity should analyze its processes over estimating collections and determine whether changes should be made.

While the provision for bad debts will likely significantly decrease, there are still situations that may result in impairment losses, or bad debts. One example is a patient-specific event that results in a patient no longer having the ability and intent to pay the amount due. These should be specifically identified. Other examples include services such as elective surgeries in which the health care entity expects to collect the full balance billed. Since bad debts are now considered impairment losses, they will be recorded as operating expenses, rather than a deduction from patient service revenue, as they are currently reported.

If the health care entity receives consideration from a customer/patient (i.e., collects a portion or all of the balance), the recording of this activity depends on whether all of the revenue recognition criteria have been met. If the revenue recognition criteria have not been met, in order to record the amount as revenue, the consideration received first must be nonrefundable. In addition, one of the following events must have occurred:

The health care entity has no remaining obligations with the patient and all, or substantially all of the consideration has been received.

The contract with the patient has been terminated.

The health care entity has transferred control of all goods or services and there is no obligation under the contract to transfer additional goods or services (i.e., perform any additional procedures).

If these factors are not present, the consideration received should reported as a liability until the appropriate criteria has been met.

In addition to the above implementation guidance, the task force provided seven examples of prevalent situations in which the above implementation issues are expected to be presented in practice.

Issue 2 – Portfolio Approach

This implementation issue analyzes the application of the portfolio approach to contracts with a patient. It discusses how to apply the portfolio approach to revenue from self-pay patients and third-party payors.

Under the provisions of FASB Topic 606, health care entities may use a portfolio approach as a practical expedient to account for patient contracts as a collective group, rather than individually, if the financial statement effects are not expected to materially differ from an individual contract approach. Judgment is required in selecting the size and composition of portfolios. Health care entities should consider grouping contracts with similar characteristics for inclusion in a portfolio, including:

Type of patient responsibility: Uninsured self-pay, co-payments, deductibles, etc., including plans with provisions such as high deductibles compared to more “standard” plans.

Once appropriate portfolios are established, the collection patterns and/or reimbursement rates should be monitored to ensure that the portfolios remain appropriate. Finally, the portfolio approach is considered optional, so health care entities can consider revenue recognition guidance on any contracts individually, such as significant balance accounts, while still applying the portfolio approach to the remaining accounts.

This approach may or may not result in significant changes to a health care entity’s existing processes, depending on the current disaggregation of patient accounts and related collection patterns of those portfolios. It will be important to review existing portfolios and consider the characteristics above in determining whether any changes should be incorporated to comply with the provisions of Topic 606.

Implementation guidance related to these two issues are included in the May 1 online edition of the AICPA Audit and Accounting Guide, “Revenue Recognition.” For more information on this guidance, including details not addressed in detail within the scope of this article, please contact Tyler Bernier or your local Eide Bailly representative.